1. Corporations: A Contemporary Approach Chapter 3 Corporate Federalism Slide 1 of 28 Gustav Klimt, Portrait of Adele Bloch-Bauer (1907)

2. Corporations: A Contemporary Approach Chapter 3 Corporate Federalism Slide 2 of 24 Chapter 3 Corporate Federalism US corporate law history – State legislative chartering – General incorporation Internal affairs doctrine – Regulation of foreign corporations – Choice of law rules – Pseudo-foreign corporations Federal abstention “Race of laxity” – Delaware wins race – Race to bottom or top? Module II – Corporations and Policy Citizen of world Law profession Corporate practice Bar exam Bar exam

3. Corporations: A Contemporary Approach Slide 3 of 25 1.Fundamentals –Introduction to firm –Corporate basics 2.Corporations and policy –Corporate federalism –Corporate social responsibility –Corporate political action 3.Corporate form –Organizational choices –Incorporation –Locating corporate authority 4.Corporate finance –Numeracy for corporate lawyers –Capital structure 5.Corporate externalities –Piercing corporate veil –Corporate environmental liability –Corporate criminal liability 6.Corporate governance –Shareholder voting –Shareholder information rights –Public shareholder activism 7.Fiduciary duties –Shareholder litigation –Board decision making –Board oversight –Director conflicts –Executive compensation –Corporate groups 8.Stock trading –Securities markets –Securities fraud class actions –Insider trading 9.Corporate deals –Sale of control –Antitakeover devices –Deal protection 10.Close corporations –Planning –Oppression 1.Fundamentals –Introduction to firm –Corporate basics 2.Corporations and policy –Corporate federalism –Corporate social responsibility –Corporate political action 3.Corporate form –Organizational choices –Incorporation –Locating corporate authority 4.Corporate finance –Numeracy for corporate lawyers –Capital structure 5.Corporate externalities –Piercing corporate veil –Corporate environmental liability –Corporate criminal liability 6.Corporate governance –Shareholder voting –Shareholder information rights –Public shareholder activism 7.Fiduciary duties –Shareholder litigation –Board decision making –Board oversight –Director conflicts –Executive compensation –Corporate groups 10.Close corporations –Planning –Oppression Chapter 3 Corporate Federalism

4. Corporations: A Contemporary Approach Chapter 3 Corporate Federalism Slide 4 of 24 State legislative special chartering Dartmouth College case (1819) General incorporation statutes Delaware GCL (1899) Takeover wave (1980s) Federal securities laws (1933, 1934) SOX (2002) Sherman Antitrust Act (1890) 18001950190020001850 US corporate law timeline D-F (2010)

5. Corporations: A Contemporary Approach Chapter 3 Corporate Federalism Slide 5 of 24 Justice John Marshall Dartmouth College v. Woodward (US 1819) Corporation: private property or social institution? “A corporation is an artificial being, invisible, intangible, and existing only in contemplation of law. Being the mere creature of law, it possesses only those properties which the charter of its creation confers upon it, either expressly, or as incidental to its very existence.” “But …. It is no more a state instrument, than a natural person exercising the same powers would be.”

6. Corporations: A Contemporary Approach Chapter 3 Corporate Federalism Slide 6 of 24 3. State corporate statutes can be amended (and thus change corporate rights) because of: a.General police powers of states b.Reservation of rights – see MBCA § 1.02MBCA § 1.02 c.Constitutional power of state to amend contracts 4. Early corporate statutes distrusted corporate power -- placing limits on corporate purposes, activities, and capitalization. True or false? 1.Corporations are: a.“Artificial beings” created by and modifiable by the legislature b.“Contracts” that cannot be unilaterally amended by the legislature 2.US corporations could only be formed by special legislative enactment, until the early 1900s when Delaware enacted a “general corporation law.” True or false? Pop quiz (corporate law history)

7. Corporations: A Contemporary Approach Chapter 3 Corporate Federalism Slide 7 of 24 5. New Jersey passed the first “liberal” corporate law that -- a.Allowed corporations to own stock in other corporations (permitting holding companies) b.Allowed shareholders to bring derivative suits c.Allowed shareholders to do away with BODs 6. New Jersey lost its “lead” to Delaware when NJ Governor Woodrow Wilson re-regulated NJ corporations. True or false? 7. The takeover wave of the 1980s was a response to the “conglomeration” of the 1960s. True or false? 8. Hedge funds (private investment pools) have have pressured PHC managers to generate high short-term returns for shareholders. Hedge funds rely on - a.Institutional investors (mutual funds and pension funds) to vote for their proposals b.Derivative suits to compel management action. Answers: 1- AB / 2-F / 3-B / 4-T / 5-A / 6-T / 7-T / 8-AB

8. Corporations: A Contemporary Approach Chapter 3 Corporate Federalism Slide 8 of 24 Horizontal corporate federalism (1) Regulation of “foreign corporations” (2) Internal affairs doctrine

9. Corporations: A Contemporary Approach Chapter 3 Corporate Federalism Slide 9 of 24 Suppose a corporation in the business of selling doughnuts – –Is incorporated in Delaware –Is headquartered in North Carolina –Locates its retail outlets in California –Gets its capital from investors in Florida Suppose the corporation– 1.Sells bad doughnuts in California – what law applies? 2.Prevents shareholders from voting in Florida – now what law? MBCA Chapter 15 Foreign corporations

10. Corporations: A Contemporary Approach Chapter 3 Corporate Federalism Slide 10 of 24 Internal affairs doctrine … Operation of doctrine Constitutional dimensions

11. Corporations: A Contemporary Approach Chapter 3 Corporate Federalism Slide 11 of 24 McDermott Inc. v. Lewis (Del. 1987) Panama City, Panama

12. Corporations: A Contemporary Approach Chapter 3 Corporate Federalism Slide 12 of 24 Public shareholders McDermott Delaware McDermott International BEFORE McDermott Delaware McDermott International 100% Remaining Public Shs 8% New public shareholders 92% AFTER 10%90%100% Exchange (1:1 + $0.35) So what if sub owns parent shares?

13. Corporations: A Contemporary Approach Chapter 3 Corporate Federalism Slide 13 of 24 “…. [courts and legislatures] have consistently applied the law of the state of incorporation to the entire gamut of internal corporate affairs. In many cases, this is a wise, practical, and equitable choice.” “ … application of the internal affairs doctrine is not merely a principle of conflicts law. It is also one of serious constitutional proportions—under due process, the commerce clause and the full faith and credit clause.” McDermott Inc. v. Lewis (Del. 1987) Delaware Supreme Court

14. Corporations: A Contemporary Approach Chapter 3 Corporate Federalism Slide 14 of 24 Constitutional dimensions … (what is pseudo-foreign corporation?) Compare (and distinguish): Wilson (Cal. App. 1982) Vantage Venture Partners (Del. 2005)

15. Corporations: A Contemporary Approach Chapter 3 Corporate Federalism Slide 15 of 24 A pseudo-foreign corporation incorporated in Utah most of its assets, payroll, sales and shareholders in California Shareholder voting California requires cumulative voting Utah has straight (plurality) voting. A pseudo-foreign corporation incorporated in Delaware most of its assets, payroll, sales and shareholders in California Shareholder voting California requires separate class voting Delaware “single class” voting Distinguish Wilson v. Louisiana-Pacific Resources Inc (Cal. App. 1982) Vantagepoint Venture Ps v. Examen Inc (Del. 2005)

16. Corporations: A Contemporary Approach Chapter 3 Corporate Federalism Slide 16 of 24 “If California's statute were replicated in all states, no conflict would result. We conclude that the potential for conflict is, on this record, speculative and without substance.” “We conclude that to the extent that the cumulative voting requirement imposed by section 2115 upon pseudo-foreign corporations is shown to have any effect upon interstate commerce, the effect is incidental, and minimal in relation to the purpose which that requirement is designed to achieve.” Wilson v. Louisiana-Pacific Resources Inc (Cal. App. 1982) Private Choice

17. Corporations: A Contemporary Approach Chapter 3 Corporate Federalism Slide 17 of 24 “The internal affairs doctrine is not … only a conflicts of law principle.” “In CTS, the Supreme Court concluded that ‘so long as each State regulates voting rights only in the corporations it has created, each corporation will be subject to the law of only one State.’ Accordingly, we hold Delaware's well-established choice of law rules and the federal constitution mandated that Examen's internal affairs … be adjudicated exclusively in accordance with the law of its state of incorporation, Delaware.” Vantagepoint Venture Partners v. Examen Inc (Del. 2005) Justice Randy Holland

18. Corporations: A Contemporary Approach Chapter 3 Corporate Federalism Slide 18 of 24 Vertical corporate federalism (1) State antitakeover statutes (2) Role of Delaware (3) Race to the top / bottom

19. Corporations: A Contemporary Approach Chapter 3 Corporate Federalism Slide 19 of 24 Anti-takeover statutes 1st generation2nd generation3rd generation Edgar v. MITE (US 1982) CTS v. Dynamics (US 1987) Response / hostile TO State securities law “fairness” review Example: Illinois Mgmt lobby Domestic corporations Voting rights (control shs) Example: Indiana

20. Corporations: A Contemporary Approach Chapter 3 Corporate Federalism Slide 20 of 24 “The markets that facilitate… ownership of corporations are essential for providing capital…. The beneficial free market system depends at its core upon the fact that a corporation… is organized under, and governed by, the law of a single jurisdiction [its State of incorporation].” “It is thus an accepted part of the business landscape in this country for States to create corporations, to prescribe their powers, and to define the rights that are acquired by purchasing their shares.” CTS v. Dynamics (U.S. 1987 ) Justice Lewis Powell

21. Corporations: A Contemporary Approach Chapter 3 Corporate Federalism Slide 21 of 24 Anti-takeover statutes 1st generation2nd generation3rd generation Edgar v. MITE (US 1982) CTS v. Dynamics (US 1987) Amanda (7 th Cir 1989) Response / hostile TO State securities law “fairness” review Example: Illinois Mgmt lobby Domestic corporations Voting rights )control shs) Example: Indiana Mgmt (w/ SH input) Incorporation-based Merger moratorium Example: Wisc, Del

22. Corporations: A Contemporary Approach Chapter 3 Corporate Federalism Slide 22 of 24 “If our views of the wisdom of state law mattered, Wisconsin’s takeover statute would not survive.… Wisconsin’s law makes a potential buyer less willing buy, but this is equally true of [many] other rules of corporate law.” “To say that states have the power to enact [inefficient anti-takeover laws] is not to say that investors should kiss their wallets goodbye. States compete to offer corporate codes attractive to firms.” Amanda Acquisition v. Universal Foods (7th Cir. 1989 ) Judge Frank Easterbrook

23. Corporations: A Contemporary Approach Chapter 3 Corporate Federalism Slide 23 of 24 “Incorporation-based private ordering” What is the “race of laxity”? Why has Delaware won it? Is this good or bad?

24. Corporations: A Contemporary Approach Chapter 3 Corporate Federalism Slide 24 of 24 Delaware bar Delaware judiciary Delaware legislature

25. Corporations: A Contemporary Approach Chapter 3 Corporate Federalism Slide 25 of 24 William Cary’s “race to bottom” Ralph Winter’s “race to top” Mark Roe’s “vertical corporate federalism ”

26. Using the E&E Corporations: A Contemporary Approach Chapter 3 Corporate Federalism Slide 26 of 28

27. Using the E&E Corporations: A Contemporary Approach Chapter 3 Corporate Federalism Slide 27 of 28

28. Using the E&E Corporations: A Contemporary Approach Chapter 3 Corporate Federalism Slide 28 of 28

29. Corporations: A Contemporary Approach Chapter 3 Corporate Federalism Slide 29 of 28 The end